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One of the more dangerous investing theses in 2012 may very well be the notion of becoming a gold bug solely because of Fed Chairman Benjamin Bernanke’s exceptionally easy monetary policy and its perceived effects on the U.S. Dollar. Over the past few years, we have seen correlations that go something along the lines of: Dollar down, metals up, commodities up, stocks up, or alternatively: Dollar up, Treasuries up, everything “risky” gets liquidated. If you are bullish on the metals because they are technically sound, or perhaps on the miners because of a properly analyzed fundamental thesis, then more power to you.
The “macro trader,” however could very well be in store for a devastating 2012 if we see correlations become untangled. In particular, let us suppose that the recent breakouts in gold and silver are not all they are cracked up to be. Let us suppose, as Carter Worth suggested on CNBC, that gold is actually working through a longer-term topping pattern, and last week’s one-day high volume selling event was the shot across the bow. If that is the case, then history tells us the Dollar and Treasuries will rise, due to the inverse relationship between the metals the world’s reserve fiat currency and the overall flight to quality away from risk.
Rather than being dogmatic, I am going to watch some key price levels on GLD. We know that gold has been in a secular bull run, so the yellow metal is innocent until proven otherwise. The farther out the elastic band stretches, though, the more cognizant you have to be of it snapping. The bulls still want to conquer and hold above the $175 level to the upside on GLD to confirm that the recent multi-month falling channel was merely another consolidation in the bull run. Bears, however, are looking to crack price below $160 to throw a wrench in the breakout thesis and put longs to the test.
If gold does become undone, the Dollar may very well strengthen, as you can see the Dollar Index chart below showing signs of a double-bottom, although Dollar bulls need to push through $82 to confirm. Treasuries remain stuck below their 2008 highs, but the idea is that I would not be surprised to see gold falter, the Dollar rise, yet Treasuries fall as capital flows into commodities and equities. Thus, the macro trader entanglement thesis would become less prevalent.
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Nice post.
ditto
Yeah, those correlations work until they don’t. Gold up, Euro up, stocks up, treasuries down, dollar down — I know that recent history says those patterns (or vice versa) always happen together. But if one looks at some longer term charts, it’s clear that it actually doesn’t always happen that way.
One of the numerous other alternate possibilities is that the dollar and metals could even rise together. That’s happened to every other currency in the world before. Why not the dollar too? Each financial instrument’s chart really needs to be looked at on its own.
markets always correlate, but not always the same way. sometimes selling in one area leads to capital flowing into another, other times capital flows and credit expands and they both correlate. money is always moving out of somewhere and into somewhere else though.
I like that party hat..
(Go, Dog. Go!..by P.D.Eastman)
so, where would one find a hat like that?
From the cycle perspective, we are probably entering the B-wave, which is basically a consolidation pattern that will probably last for a year to a year and a half. So except for a fast trade here and there out of an intermediate cycle,the cycle theorist are waiting for the glorious C-wave to start sometime in the Spring of 2013. And of course, the parabolic end of the C wave is where the money is made, just like it was in 2010 and the beginning of 2011. If I enter at all before the C-wave, it will be while coming out of the bottom of a cycle,when the technical picture looks right, and only for a short period of time.
Interesting behavior on NUGT AH Friday night…closed at $22.40s, but in the last half hour before 8pm, a string of consecutive trades pushed it down to $21.70 range. Deep pockets want to buy the open low on Monday and didn’t mind throwing away some pocket change on an attempt to influence sentiment during a low volume period, which will be noticed Monday morning.
Chess, how do you feel about using ETFs like TLT and Spiders like GLD in doing your technical analysis? While I like TLT as a trading vehicle, it doesn’t accurately reflect 30 year Treasury yields or pricing. Fine, I realize that it doesn’t market itself as a “Long Bond” mirror, but there sure are a lot of people out there using it as a replacement, or direct indicator. When it comes to GLD, it seems to trade like a near term futures contract (sometimes exceeding and sometimes falling behind its NAV). Your cautionary note is great, but to work on monitoring/dismantling the gold/yield/M supply thesis, maybe it’s a good idea to run up other technicals.
Not so much for TLT, but GLD yes. With TLT I just look at it broadly.
Thank you for taking the time to respond. I guess I lean towards looking at TLT broadly as well… now wondering if there’s support from sufficient participants to make TLT rise to the position of “esteemed indicator”.